Submitted by: Submitted by sheloumae
Views: 261
Words: 836
Pages: 4
Category: Business and Industry
Date Submitted: 07/17/2013 07:03 PM
FINANCIAL FORECASTING
CONSTRUCTING PRO FORMA STATEMENT
Comprehensive means of financial forecasting – to develop a series of pro forma, or projected, financial statements
Based on projected statements – the firm is able to estimate its future level of receivables, inventory, payables, and other corporate accounts as well as its anticipated profits and borrowing requirements.
PRO FORMA INCOME STATEMENT
Pro forma income statement – will provide a projection of how much profit the firm anticipates making over the ensuing time period
* 4 important steps:
1. Establish a sales projection
2. Determine a production schedule and the associated use of new material, direct labor, and overhead to arrive at gross profit
3. Compute other expenses
4. Determine profit by completing the actual pro forma statement
The main consideration in constructing a pro forma income statement – is the cost specifically associated with units sold during the time period
CASH BUDGET
Primary consideration for cash payments - are monthly costs, inventory, and disbursements for general and administrative expenses, interest payments, taxes and dividends
Primary purpose of cash budget – to allow the firm to anticipate the need for outside funding at the end of each month
RISK AND RETURN
DEFINITION OF RISK IN CAPITAL BUDGETING
Risk – variability of possible outcomes from a given investment. Is measured not only in terms of losses but also in terms of uncertainty
THE CONCEPT OF RISK – AVERSE
Risk-averse – for a given situation they would prefer relative certainty to uncertainty. They will require a higher expected value or return for risky investments
*2 important statistical measures:
1. The expected value
2. Standard Deviation
Expected Value – weighted average of the outcomes (D) times their probabilities (P).
Standard deviation – the measure of dispersion or variability around the expected value
The larger the standard deviation, the greater is the risk
Coefficient of...